Option contracts - Long the put contract

CFA Level I Equities
#1

Option contracts

The holder is long the put contract (i.e. he/she has the right to sell the asset and will benefit if the price of the underlying instrument falls)

In the above case, the holder will have indirect short position in the underlying instrument , please help me explain the reason for same ?

Thank you!

#2

Synthetic put will show this:

By put call parity: c+X/(1+r)=p+s

so: p=c+X/(1+r)-s

Be long the put is equivalen to a long position in a call, long position, and short the underlying.

#3

Hi dwheats,

I am sorry but I am unable to understand the above equation. If you could explain it briefly.

Thanks!

#4

When you have a short position in the underlying, you gain when the price decreases.

When you have a long position in a put option, you gain when the price of the underlying decreases.

That’s all they’re saying.

#5

Got it, Thank you!

#6

My pleasure.